Linktone (LTON) reports high end of raised guidance; SMS, IVR, and RBT grow; MMS and WAP decline (1Q05 earnings)

| About: Linktone Ltd. (LTON)
This article is now exclusive for PRO subscribers.

Linktone (ticker: LTON), a Chinese wireless value-added service company reported Q1 2005 earnings results today. The company reported at the high end of revised guidance for both revenue and diluted earnings per ADS. There were no analyst estimates available. Details:

Q1 Results
(all percentage changes and comparisons are year on year, unless stated otherwise)

  • Gross revenue rose 60.5% to $15.1 million, but fell 3.0% sequentially. Company guided for $14.5 - $15.5 million.
  • Net revenue rose 62.2% to $14.4 million, but declined 2.6% sequentially.
  • 2.5G (MMS, WAP) and audio-related service revenue fell 17.2% sequentially to $5.3 million.
  • 2.5G services accounted for 14% of gross revenue versus 29% in Q4.
  • Audio-related services, including interactive voice response (NYSE:IVR) and ring-back tone (RBT) services generated 21% of gross revenues, up from 12% in Q4.
  • SMS revenue rose 7.7% sequentially to $9.8 million.
  • Gross margin of 66.2% versus 68.5%, and 68.2% in Q4.
  • Operating expenses rose 101.8% to $6.6 million, but fell 2.9% sequentially.
  • Operating expense margin was 45.7% versus 36.7%, and 45.8% in Q4.
  • Operating income rose 5.0% to $3.0 million, but fell 10.5% sequentially.
  • Operating margin was 20.5% versus 31.7%, and 22.3% in Q4.
  • GAAP net income rose 12.8% to $3.2 million, but fell 3.5% sequentially.
  • Net margin of 22.2% versus 31.9%, and 22.4% in Q4.
  • GAAP earnings per fully diluted ADS of  $0.12 versus $0.11, and $0.12 in Q4. Company guided for $0.11 - 0.12.
  • Excluding the effect of a non-cash expense, adjusted net income rose 14.7% to $3.7 million, but fell 8.6% sequentially.
  • Adjusted earnings per fully diluted ADS (excluding the effect of non-cash expense) of $0.14 versus $0.13, and $0.15 in Q4. Company guided for $0.13 - 0.14.

Income Statement Notes

  • Sequential decline in 2.5G due to the impact of changes in China Mobile's MMS revenue recognition policy for 2005, which now requires MMS delivery to an active mobile phone for live receipt by the user, rather than to a mail box for later retrieval; and China Mobile's imposition of sanctions and penalties on Linktone's WAP services and withholding of WAP revenue from January 1 to June 30, 2005.
  • The increase in IVR and RBT revenue due to sales promotions, effective cross-selling, and the penetration of new provinces with China Unicom.
  • The sequential SMS growth due to increased promotional activity, as well as the near-completion of China Mobile's implementation of its Mobile Information Service Center (MISC) platform, which had exerted downward pressure on Linktone's SMS sales during 2H 2004.
  • The sequential decrease in gross margin was due to increased sales of lower-margin IVR and ring-back services and decreased sales of higher-margin MMS and WAP services.
  • The sequential decline of operating expenses reflected lower personnel-related expenses and seasonally lower marketing expenses in Q1.
  • Non-cash stock-based compensation expense was $0.5 million.
  • The sequential decrease in ARPU reflected lower MMS and WAP sales.

Balance Sheet

  • At March 31, 2005, cash and equivalents totaling $80.2 million.

Q2 Guidance

  • Gross revenue of approximately $16.0 million.
  • GAAP net income of $0.13 per fully diluted ADS.
  • Excluding the anticipated effect of non-cash stock-based compensation expense in the amount of $0.5 million, the company expects adjusted net income of approximately $0.15 per fully diluted ADS.

CEO Raymond Yang

....We were pleased with first-quarter earnings, which met the high end of our previous expectations, despite the ongoing impact of mobile operators' regulatory and accounting policies on sales of 2.5G services. Notably, we experienced strong growth in audio-related services and renewed demand for short messaging services (SMS), which grew sequentially for the first time since the second quarter of 2004. We look forward to building our core wireless business and diversifying our revenue streams over the coming quarters. Toward this goal, our recent acquisition in May of Brilliant Concept Investments Ltd. (Brilliant) signals Linktone's entry in the online casual gaming market and development of an interactive entertainment community in China.

LTON chart.